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- An all-equity company with a cost of capital of 9% expects its EBIT will be $270,000 every year forever. Assume all available earnings are immediately distributed to common shareholders and all the M&M assumptions are satisfied except the company's corporate tax rate is 20%. What is the value of the company according to M&M Proposition I with taxes?arrow_forwardS Corp. is expected to pay a $2.55 dividend at year end, the dividend is expected to grow at a constant rate of 4.50% a year, and the common stock currently sells for $35 a share. The before-tax cost of debt is 5.50%, and the tax rate is 40%. The target capital structure consists of 40% debt and 60% common equity. What is the company’s WACC? Do not round your intermediate calculationsarrow_forwardRDJ Corp. has expected earnings before interest and taxes (EBIT) of $5,000 (assumed to continue forever). Its unlevered cost of capital is 13.0% and its corporate tax rate is 35%. The company would like to borrow debt that amounts to $2,000 and use the proceeds to buy back shares. This debt has a 7.0% annual interest rate and pays interests annually. What is the firm's cost of equity, after this capital conversion? O A. O B. O C. O E. 10.05% 13.33% 15.14% OD. 13.82% 12.65% B 10 19 28 37 46 Finisarrow_forward
- S Corp. is expected to pay a $2.55 dividend at year end, the dividend is expected to grow at a constant rate of 4.50% a year, and the common stock currently sells for $35 a share. The befoes-tax cost of debt in S and the tax rate is 40%. The target capital structure consists of 60% debt and 40% common equity. What is the company's WACC? Do not round your intermediate calculations. Ⓒa. 8.39% b.9.24 % O c. 6.25 % Od. 6.69% Ⓒ.7.97%arrow_forwardThe Alcatel has a tax rate of 30%. The company can raise debt at a 12% interest rate and the last dividend paid by Alcatel was PO.90. Alcatel's common stock is selling for P8.59 per share, and its expected growth rate in earnings and dividend is 5%. If Alcatel issue new common stock, the flotation cost incurred will be 10%. Alacatel plans to finance all capital expenditures with 30% debt and 70% equity. a. What is alcatel's weighed average cost of capital if the firm has sufficient retained earnings to fund the equity portion of its capital budget? b. What is alcatel's weighted average cost of capital if the firm raised the equity portion by selling new shares of stock? c. What is the cost of equity if its retained earnings can cover only 60% of its equity requirements and the rest new issue of common shares will be sold? show solutionarrow_forwardThe net income of Steel City Corporation is $90,000. The company has 20,000 outstanding shares, and a 100 percent payout policy. The expected value of the firm one year from now is $1,780,000. The appropriate discount rate is 11 percent, and there are no taxes. a. What is the current value of the company assuming the current dividend has not yet been paid? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. What is the ex-dividend price of the company’s stock if the board follows its current policy? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) At the dividend declaration meeting, several board members claimed that the dividend is too meager and is probably depressing the company's stock price. They proposed that the company sell enough new shares to finance a dividend of $5.70. c-1. Calculate the value of the company under this proposal. (Do not round…arrow_forward
- The net income of Steel City Corporation is $90,000. The company has 20,000 outstanding shares, and a 100 percent payout policy. The expected value of the firm one year from now is $1,780,000. The appropriate discount rate is 11 percent, and there are no taxes. a. What is the current value of the company assuming the current dividend has not yet been paid? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. What is the ex-dividend price of the company’s stock if the board follows its current policy? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) At the dividend declaration meeting, several board members claimed that the dividend is too meager and is probably depressing the company's stock price. They proposed that the company sell enough new shares to finance a dividend of $5.70. c-1. Calculate the value of the company under this proposal. (Do not round…arrow_forwardABC is an unlevered firm with EBIT of $12,257 per year forever. Its unlevered cost of equity is 11%. It plans to borrow $36,348 perpetual debt at 6% to buy back shares. If the corporate tax is 26%, what is the firm value after the recapitalization?arrow_forwardGlobal Advertising CompanyThe Global Advertising Company had net income after interest but before taxes of $40,000 this year.The marginal tax rate is 40 percent, and the dividend payout ratio is 30 percent. The company can raisedebt at a 12 percent interest rate for any amount of debt less than $8,000. If the firm raises $8,000 ormore of debt, a 15 percent interest rate will apply to that new debt. The last dividend paid by Global was$0.90. Global's common stock is selling for $8.59 per share, and its expected growth rate in earnings anddividends is 5 percent. If Global issues new common stock, the flotation cost incurred will be 10 percent.Global plans to finance all capital expenditures with 30 percent debt and 70 percent equity.39. Refer to Global Advertising Company. What is Global's cost of retained earnings?a. 12.22%b. 17.22%c. 10.33%d. 9.66%e. 16.00%40. Refer to Global Advertising Company. What is the cost of common equity raised by selling newstock?a. 12.22%b. 17.22%c. 10.33%d.…arrow_forward
- Mama Inc. utilizes the residual dividend model to determine its ordinary dividend payout. This year the company expects its net income to be P2,000,000, and it expects to retain 75% of the income. The company’s target ordinary equity ratio is 40%, and the firm is financed with only ordinary equity and debt. 1. How much is the addition to retained earnings? 2. What is the plow back ratio? 3. What is the company’s forecasted total capital budget for the year?arrow_forwardA company used to have zero debt and just issued 195,000 of perpetual 9% debt and used the proceeds to repurchase stock. The company expects to generate 83,000 of EBIT in perpetuity. The company distributes all its earnings as dividends at the end of each year. The firm's unlevered cost of capital is 15% and the tax rate is 40%. What is the value of the levered firm after the repurchase? PV of a perpetuity: C/r MM Theorem 1 with taxes: V₁ = Vu+ TC B $420,000 $400,000 $390,000 $410,000arrow_forwardA company currently has a WACC of 10.6 percent and no debt. The tax rate is 21 percent. a. What is the company’s current cost of equity? b. If the firm converts to 40 percent debt with a cost of 6%, what will its cost of equity be? And the WACC? c. If the firm converts to 60 percent debt with a cost of 6% , what will its cost of equity be? And the WACC? d. What can you conclude from the values of the cost of equity and WACC obtained in b. and c. Please show excel formulasarrow_forward
- EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENTIntermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning